Let’s say that you owed me $500. If I told you I was going to take $20 per week for an entire year out of your pay to cover your debt and then refund you any difference, how would you react? Wouldn’t you object to paying me $1,040 over the course of the year for a debt of only $500 even though the extra $540 is going to be returned to you eventually?

Well, if you get a large refund from your taxes every year you are actually already involved in a situation like I have just described. We all prefer to get refunds rather than owe at tax time, but too big of a refund only means you are giving the government too much money during the year.

Why would you want to give more money to the government than you need to? By reducing your withholding you can have access to some of that large refund you normally receive after the end of the year, evenly throughout the year.

Sometimes I hear the argument that it is a way to save money, since you do not have access to it and therefore won’t squander it during the year. This is a terrible way to look at your refund as well. You don’t earn any interest on the amount you overpay to the government, so you aren’t really “saving” money more than you are actually giving the IRS an interest free loan. With direct deposit you could have an amount that comes close to your annual refund deposited into a savings account little by little throughout the year. It will involve a certain amount of will-power in order to leave it alone and not spend it, but at least it will be there if you absolutely need it and it will be earning a little interest along the way too.

I have had more new clients in the past two years come to me than in previous years to reevaluate their withholding and make adjustments to reduce the large refunds they are used to receiving. Not surprising considering that as the economy slows down, people need to better their cash flow any way possible. How about you? Take a look at your last few returns. Did you receive a refund? Was it a decent sized refund every year, say over $700? If so, maybe you should consider adjusting your withholding and getting back some of that money during the year, rather than waiting for your tax refund each year.

The amount that someone considers a large refund will vary by individual and the situation. For some $700 may be too low to consider adjusting their withholding. Others would love an extra $10 per week in their pocket throughout the year and a $180 refund, rather than waiting for that same $700 refund someone else considers too little to worry about.

One thing to keep in mind is if your tax situation tends to change drastically from year to year, adjusting your withholding can be a trickier and on-going process. Even if your tax due amount each year is fairly consistent, you should revisit your withholding on a yearly basis to make sure you will pay in at least the minimum amount of tax you will be required to pay in during the year (the minimum amount of tax you need to pay in each year is based on your prior year tax due and is a concept known as “safe harbor”, which I will be discussing in depth in a future post).

Adjusting your withholding beats any rapid refund loan you may get every year from a retail tax preparation company, in that it is faster since you are getting it right away throughout the year and it doesn’t cost you a dime to change.

This may be another area where CPAs and other professional preparers differ from self preparation software and retail stores. A retail preparation location makes money on those rapid refund loans, so they may not recommend adjusting your withholding since they would prefer you to use their refund product each year. Self preparation software uses large refunds as a draw to get you to use their software, stating things like a maximum refund guarantee in their commercials. Software probably won’t recommend adjusting your withholding as it is more for tax preparation than it is tax planning.

However, a CPA wants to assist you in paying in as little as possible throughout the year and would rather see that money in your pocket now than waiting for a large refund. If you usually receive large refunds think about speaking to a CPA about your tax situation and if it might be a good idea to adjust your withholding.

These days, you have many options when it comes to preparing your taxes. You can go to a storefront service such as H & R Block, Jackson-Hewitt or Liberty Tax, purchase preparation software such as Turbo Tax, use web based software offered by various companies or go to a licensed professional such as a Certified Public Accountant (CPA).

I often get the question; Why should I use a CPA and not just use Turbo Tax? Being a CPA, most would expect me to always have a reason why going to a CPA is the best possible route, but actually that is not the case. Truth is, sometimes it makes more sense for someone to go to a storefront service or use tax preparation software. The trick is knowing which type of taxpayers should use each service and why.

In this article I take a look at each type of paid preparation service and who should use them.

(1) Self Preparation Tax Software

To me, tax preparation software (either web-based or out-of-the-box) is usually best for the simplest tax returns. That’s not to say that it can’t handle more complicated tax situations, only that I feel it is best suited for easy to moderate returns. Preparation software usually runs you through a list of questions that you answer, based upon your situation, then will ask for further information depending on your answers (including amounts and other information from tax forms) and completes the return based upon your answers. This is a great way to prepare if you have a straight forward return, or if you are relatively tax-savvy and you have a mildly complicated return.

But the downsides to tax preparation software are increasingly obvious as the returns you try to prepare with it become more complicated. One downside is the lack of a human element on the software side of the equation. You know those automated telephone menus we have all come to accept and know so well that you have to go through when you call large companies? We all know it can get frustrating going through menu after menu trying to either get the answer to what may be a relatively simple question, or get through to a human being. Well retail tax preparation software can sometime give you this feeling. This type of software has been made to be as simple as possible when asking about your tax situation or explaining various parts of the tax code to you as you try and do your return. However there are many things in the tax code that are not easy to simplify. If you run into these types of issues and need further explanation, the software is limited in the help it can offer you. From that point you need to either spend time researching, or make a call to someone who can provide a better explanation.

Most simple returns won’t run into this issue, but even those who usually have simple returns can run into a complicated tax situation, such as a foreclosure, that retail tax preparation software may not be best suited to handle for you if you are not educated on the applicable tax laws.

To me the lack of a human element is a big issue. Many things in today’s society can be streamlined through technology, however the complicated tax code and the seemingly infinite amount of variables that go into a taxpayer’s individual situation still require the support of a knowledgeable professional in my opinion.

(2) Retail Tax Preparation Companies

That brings me to the store front tax preparation companies. These are the H & R Blocks and Jackson-Hewitts of the world. Those individuals who have moderately complicated returns that I wouldn’t recommend retail tax software for, should probably go to a company like this for their tax preparation. I have heard many horror stories about people using store front preparation companies and having someone who is basically reading instructions on their computer screen as they input your information. That can’t give you a very secure feeling. On the other hand, I am almost certain that this is not the true representation of what customers experience when they go to these companies to have their taxes done. On the whole, many of the employees of these companies are knowledgeable or have very knowledgeable people on site to assist them if needed.

If you have a relatively simple small business or a moderately complicated individual return, this is a great place to go. In some instances, you can walk in and then walk out with your tax return completed shortly thereafter.

There are a few downsides I see in the store front option. First there is the possibility of employee turnover at these retail locations. That means you may not have the same person preparing your taxes on a year to year basis and therefore you will not have any relationship with your return preparer. For the simpler returns this doesn’t matter much, but for those taxpayers that have more layers of complication to their tax situations, it is advantageous to have the same person preparing your taxes each year.  This allows your tax preparer to know you and your tax situation more thoroughly which may lead to them providing tax planning suggestions.

Second, I feel that these locations tend to focus a lot on the current year and not a person’s future tax situation. Tax planning is an important part of the tax preparation process, especially for small business owners and should not be ignored. However the sense I get from retail tax preparation companies, and a former employee of one of these companies I have spoken with, is that taxpayers are moved along in a brisk manner in order to get to the next taxpayer which means they are primarily focused on getting the current year tax return finished and moving on to the next customer.

Lastly, a taxpayer may pay the same or even more in some instances, having their taxes prepared at a retail tax preparation site rather than having a CPA do the work. Most of these companies charge by the form, while most CPAs charge by the hour. This point depends a lot on the hourly rate of the CPA you may be comparing to and the complexity of your return, but on average each year I have about two clients come to me that pay less than what they paid a retail tax preparation company the previous year. It all depends on your situation, so do your homework and you may get more expertise for less money.

One last note, whatever you do, stay away from those rapid refund loans. You are basically receiving your refund a couple of weeks early while paying outrageous interest rates. E-filing with direct deposit has a very quick turn-around for refunds in most cases, so just try and wait it out.

(3) CPA

Obviously I am a little biased since I am a CPA, but having a CPA prepare your taxes has many advantages. A CPA should take the time to analyze your current tax situation and make recommendations to possibly improve that situation for the short-term and long-term. By having the same preparer each year, you will develop a professional relationship and your preparer will be better equipped to help you with tax planning suggestions. This also allows you to easily contact your CPA and bounce tax questions off of him/her during the year without having to give all of your tax background since your preparer is already aware of your situation.

One of the types of taxpayers that I see most benefiting from a CPA is the small business owner. There are so many issues that go into owning a small business such as payroll, succession planning, retirement plans, benefit analysis of large capital purchases, etc., that retail software and retail preparation stores just are not equipped to assist you with.

I mentioned above that a taxpayer with a very simple small business could go to a storefront preparation location, but I would only suggest this if that taxpayer has no interest in growing their business. If the business owner intends on growing their business, a CPA will be a valuable asset from the beginning as they will be able to help with items such as choice of entity and explaining the tax situations associated with each option, registering the business with your state, assisting with or handling your payroll and helping you chose and set up accounting software. Those are just a few examples of what a CPA can do to assist the small business owner.

Taxpayers who have more complicated returns, such as those who own a few rental properties or investors that qualify as day traders, would be better served going to a CPA who has handled those types of situations before and are familiar with the particular tax laws that apply to them.

A CPA should be viewed as a resource for the taxpayer who can be accessed year-round and not just once a year when taxes are due. Most CPAs, like myself, work hard at developing relationships with other professionals such as attorneys, financial planners and bankers so they have a network of individuals they can draw from to help better assist their clients if the need arises. In fact, just this past month, I had a client get their loan request for purchasing another business turned down by a bank.  After speaking with a contact of mine at that bank, I was able to have the loan application resubmitted and approved. Retail tax software definitely cannot help a taxpayer in that situation!

When all is said and done, a taxpayer need only review their situation and do a little research to determine what type of paid preparation is right for them. One rule that always comes to mind when discussing this subject with a potential client is “You get what you pay for.” This is true on a few levels. First, even if you have a CPA prepare your taxes, but they have a significantly lower hourly rate than their peers, you may not be getting the best service – so be sure to do your homework if you find a preparer who seems very cheap compared to their competitors. Second, if you don’t need that much assistance or advice since you have a simple return, you don’t need to be paying for that service by going to a CPA so software like Turbo Tax might make the most sense for you.

In the end each service has one goal in common; to assist you in filing your taxes while making sure you are paying the lowest amount of tax legally possible. Just make sure you are using the right type of service for your situation and you can rest assured that you will achieve that goal.

While interviewing one of my new clients this year the topic of the amount of time they volunteer at a non-profit organization came up. They were expressing how they felt they should get some type of charitable deduction for the time they donate to the organization, but I had to explain that the IRS does not allow a deduction for the value of your time as a charitable contribution.

However, I then started asking more questions as to what they do for the organization and what types of things they pay for out-of-pocket while volunteering and this opened up a whole new avenue for additional charitable deductions.

Apparently my new client is a group leader for the organization and uses her own vehicle to transport members of the organization to different outings held at campgrounds, amusement parks, museums, baseball games and other such venues. I then explained how the mileage they are driving for the charity is actually a charitable deduction they can take on their tax return. Now while the business mileage reimbursement rate set by the IRS for 2010 is $.50 per mile, charitable mileage reimbursement is set at a lower rate of $.14 per mile for 2010 and that still was significant in my client’s case.

According to the IRS, travel expenses such as transportation, meals and lodging are all deductible if there is not a significant element of personal recreation or vacation in the travel. I stress that these costs need to be directly related to the charitable work you are doing. If the main reason for a trip you take is personal and you also happen to do some work for a charity along the way or while you are at your destination that does not make all or part of your trip qualify for a charitable deduction.

The next topic my client and I discussed were the costs that they paid out-of-pocket for their own admission into the various venues they brought groups to while volunteering for the charitable organization. I explained how all of the tickets or admission that she paid for her own entry into these venues qualified as a deduction. It is important to note that only their own ticket/admission was deductible and anything they paid for someone else to attend (whether it was a dependent or an unrelated party) was not deductible.

Lastly we discussed the uniform my client was required to wear while volunteering for the organization. The cost of purchasing the uniform and anything paid to clean/maintain it is also deductible. The main thing the IRS brings up with this situation is that the uniform cannot be suitable for everyday wear. A good example here is Girl Scout and Boy Scout troop leader uniforms. Since those types of uniforms are not for everyday use they are considered a deductible charitable expense as long as they are a required part of your volunteer work

Given the amount of time my client was volunteering to this particular organization they had racked up a significant amount of out-of-pocket expenses and charitable miles that were deductible on their tax return and it made a difference in their bottom line.

In the end my client may not have gotten the entire value of their time they had volunteered for the organization, but they did get some deductions and that made them very happy.

Always be sure that the organization you are donating services, money or property to is a qualified organization that the IRS will allow you to deduct charitable contributions for before you claim them on your taxes. I would suggest taking a look at IRS Publication 526 for additional information on what types of organizations qualify and what types of contributions qualify for charitable deduction purposes as what I have given here is a summary of one particular situation. You will need to research any similar contributions you think may be deductible or speak to a professional preparer before making a final decision as to whether they should be deducted on your own return.